The first quarter of 2023 began in bullish fashion. Eager to put a miserable 2022 behind them, investors lined up to buy stocks in January, pushing the S&P 500 index up over 6% for the month alone. The overall mood shifted in early February and by March 13th briefly traded back below year-end ’22 levels before rallying to close the quarter up 7.03%, thanks almost entirely to the technology sector. The US bond market also enjoyed a strong quarter, with the Bloomberg Aggregate Bond index gaining 2.96%.
Sources driving continued market volatility include the usual suspects – Federal Reserve monetary policy and recession concerns – plus a new challenge not seen in recent years…bank failures. Fed chairman Jerome Powell continued to frustrate stock investors in February by declining to so much as signal any forthcoming ‘pivot’ from hiking interest rates – until the failure of Silicon Valley Bank in early March forced him to moderate the central bank’s messaging as the pressures facing the entire regional banking system came to light.
Equity traders’ perverse “bad news is good” mentality kicked in at that point, triggering the stock market rally over the final two weeks of the quarter. Meanwhile, the bond market maintained its more sober assessment of economic reality as US Treasuries rallied strongly in response to the banking situation, clearly demonstrating its view that recession is unavoidable as banks’ willingness to lend has become further subdued.
The S&P 500 index starts the 2nd leg of the 2023 stock market relay still 14.3% behind where it was fifteen months ago. Patience is advised for investors who have grown weary of this now long-in-the-tooth bear market, which has yet to decline to valuation levels anywhere close to those which have marked past bear market bottoms. History may not ultimately repeat itself in this regard, but it’s difficult to envision a new bull market (which would require yet higher stock valuations) beginning in the current economic context of historically high inflation, massive public and growing private debt, a struggling banking sector, and a Federal Reserve that has run out of sensible options for combatting one problem without causing others. The bond market reflects this much better than the stock market, as evidenced by the yield curve which remains inverted even as interest rate levels have fallen significantly amid recent developments.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Investing involves risk including loss of principal. No strategy assures success or protects against loss. The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
Market data provided by JPMorgan Asset Management and MarketWatch.com.
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
The Bloomberg Barclays U.S. Aggregate Bond Index is an index of the U.S. investment-grade fixed-rate bond market, including both government and corporate bonds.
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